In the thick of it, illiquidity and insolvency blur. But not after the fact.
As usual, Levine put it best: “the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet” [1].
Before one is insolvent, illiquidity and insolvency are circular questions of asset value. After the fact, it shouldn’t take someone more than a few minutes to come to a conclusion. (There is a deeper discussion on the folly of accepting as collateral assets correlated with confidence in oneself. I recommend reading the article.)
> I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.
and this is why banks are not allowed to use customer deposits for such activities.
And if they do, they must have equity value to back it up - aka, the bank's share holders lose value _first_ when shit hits the fan, before customer deposits. Then lastly, the gov't has put up guarantees on the deposits in case bank equity cannot cover customer deposits when shit hits the fan.
Crypto has none of the above - so basically, it is exactly what happened in the early days of the US financial system - i'm talking in the 1800's!
A lot of people have been smoking the copium pipe with crypto. Whenever you rightly make these points there's a flurry of downvotes. The only benefit crypto had, was to early movers. Beyond that it's a waste of effort.
I expect in a recessionary environment the pressure for a wider crypto market will be too great for many large operations to sustain.
Let's hope all those celebrities who made adds got paid in real cash!
Banks inherently gamble with customers deposits, every loan is a gamble. They also can invest in certain types of debt securities, there’s security regulations but that isn’t bad on its own.
What FTX did is much worse. They spent their customer’s money on stupid shit like the Miami Heat stadium, political donations, and charity work (which was legitimately really good but not their choice to make), and then replenished their own coffers by making their own crypto out of nothing and assigning it to themselves. They essentially stole their customer’s money.
> Banks inherently gamble with customers deposits, every loan is a gamble
While there's a ton of nuance here, in the general case it doesn't work how you've implied.
When you take out a mortgage, the bank doesn't take a bunch of money other people have deposited. It's literally created out of thin air and marked as a liability on their balance sheet. This is how the majority of money is created in a fractional reserve banking system.
When you bring money to a bank, that money is treated as both a liability (to you) and also as collateral against which the bank can lend money to others.
When a bank lends money to you, it's net neutral. A $100,000 mortgage creates a -$100,000 position on the bank's liabilities list and a $100,000 deposit in your bank account. They create $100K in new money to fund this loan collateralized by both the reserves on deposit at the bank and by the property which you purchased. As you repay that balance, the money that was created to fund your loan blinks out of existence. It is the constant origination of new loans and the constant repayment of old debt which defines the supply of money in the economy - which is why interest rates matter. Neat huh.
I would argue that your balance is both an asset and a liability as defined by your bank's reserve requirements. Your mortgage is net neutral to the bank except for the interest paid on it, which is an annuity of sorts with a net present value offset by the difference between projected recovery rates and your risk of default. The value there is itself created in the origination and underwriting process.
We'll I'll just ask two:
Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fine, but the bank is creating money out of thin air, where does the cash come from if lots of people do the same?
Follow up: more realistically, I wire money to the seller, what actually happens between the banks? It seems like bank A creates money from nothing and sends it to bank B, what is stopping bank A from sending out an infinite amount of money to other banks?
> where does the cash come from if lots of people do the same?
the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it.
If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper.
> I wire money to the seller
Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks).
> what is stopping bank A from sending out an infinite amount of money to other banks?
The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).
but you cannot create enough, because before you created, you did not have enough reserve to legally create the loan. The newly created loan cannot be part of the reserve to which you count towards your original reserve requirement to qualify to make the new loans!
otherwise, this would just be a loophole in the reserve requirement laws.
And these monies are not cash - they are loans. If these loans default, and the bank somehow cannot collect the collateral for it, the bank will lose equity. Aka, the shareholders of the bank takes the loss. If this loss is great enough, the bank becomes insolvent. That's why banks do not lend to risky people, or takes a larger collateral.
>A $100,000 mortgage creates a -$100,000 position on the bank's liabilities list
On a financial statement of a real, 120 year old bank on sec.gov, loans are in the asset section of the "Consolidated Statements of Condition". The deposits are in the liabilities section, and there are no negative numbers in either part.
>and a $100,000 deposit in your bank account.
Is that what happened the last time you applied for a mortgage?
It's not, this is a common economist fallacy. In practice the bank cannot make a new loan if it doesn't have the liquidity and doesn't have the funding. You may elect to keep the money on a bank account at that bank, in which case it looks like the bank just made two accounting entries, but you often buy something for it which means the money goes away. Whatever you do, the bank couldn't make that loans if it didn't have the liquidity for that loans sitting around.
There's certainly rules around how much liquidity a bank needs when lending (otherwise they could lend infinitely), but they don't need liquidity equal to all their loans. That's why it's called fractional reserve.. they only need a fraction of the funds in reserve.
Regulatory liquidity requirements are essentially a function of their deposits not their loans (LCR - though some credit is given to incoming cash flows). But I am not even talking about that. From a very practical point of view, the bank will not allow you to draw on a loan if it doesn't have the cash for it.
Only the central bank can create money out of thin air.
To take a very simplistic example, let's say we start with an empty economy, no money anywhere. The central bank creates 100 out of thin air and buys something from an individual. That individual places the money as deposit with bank A. Now bank A has 100 deposit liabilities, and 100 cash (deposit at central bank).
Now another individual can borrow from bank A and place the money with bank B, so now bank A has a 100 deposit liability and 100 loan asset. Bank B has a 100 deposit liability and 100 cash asset (deposit at central bank). This is the money multipler, m2 = 300, 100 in bank A, 100 in bank B and 100 at central bank, whereas the central bank only has created 100 of m1. However bank A cannot make a new loan out of thin air, it doesn't have cash anymore. The capacity to make loans is with bank B, where the cash is.
It is not the case that banks can make loans with no consideration for their funding and liquidity position, just by creating two accounting entries, only the central bank can do that.
It's not exactly out of "thin air", since we are trying to be nuanced here. If you take out a mortgage to buy a house the bank does loan you the money out of their own funds. It's just that the seller who receives your funds will put the money back into the banks (not necessarily the same bank, but the money market is there for the banks to settle among themselves). So in effect the sellers make the loans to buyers, intermediated through the financial system.
> the bank does loan you the money out of their own funds
Nope. This is the toy model of money and banking taught in high school.
When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.
It's important to understand that banks also destroy money when loans are repaid.
Everyone always brings up the fact that banks create money out of thin air when issuing loans. Nobody ever mentions that the inverse happens again at the other side.
I'm not sure how much it's because everyone just parrots the factoid that "banks create money" without understanding it, or they are deliberately trying to mislead people into distrusting the banking system.
The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan.
The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
> bank must reach some level of capital requirement to make this loan
No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
What do you mean "toy model"? It is how it works operationally. Banks have to settle up by end of each business day or they are out of the business. The fact money is created with loans in a fractional reserve system does not negate operational constraints.
The toy model is the idea that a bank gets deposit from one customer and loans it to another. This is not how it works. If you go to a bank for a loan, they do a risk assessment of you, and then make some marks on a ledger. As a result of this, new money appears in your account.
But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements.
There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
Actually the "toy model" is exactly how it works. When you take a loan from the bank and deposit their check your bank must pay whoever the amount on their check. There is not some mysterious ledger they just mark.
The fact that a bank takes an illiquid asset - your promise to pay them back - and turns it into a liquid claim on themselves is not creating money out of "thin air". Your promise to pay the bank is not "thin air" as you will quickly find out if you break your promise.
No, banks loan customer funds out as mortgages. It is not literally created out of thin air. You deposit money, the bank gives it to joe to buy a house, he sends it to the seller. Now the seller has your physical money, and joe owes the bank what the bank owes you.
The original comment that I answered is technically false if there exist a single mortgage that isn't a gamble.
Now, if only a single such mortgage existed you’d still have a point, but the fact is millions of loans are given and paid back every year without any complications at all: there is plenty of income and plenty of security for very many loans.
IIRC, what Lehman did was to deliberately trade in bundles of sub prime loans.
Nope, just smaller apples and bigger apples. There’s no such thing as a mortgage that isn’t a gamble. At best you can say there are mortgages which are safer (even much much safer) than others.
“There’s no risk here” is what causes financial crises and bank runs, which is the larger point.
The real estate market is just that - a market. Your house can absolutely become worth less than the amount you borrowed over the period of your borrowing.
Just because the odds are currently in their favour, doesn't make it not a gamble.
If you think that isn’t a gamble, learning some history is in order. Real estate markets can go down, often in highly correlated events – for example, in San Diego in the 90s prices fell and stayed down for years because Cold War defense contractors laid off a ton of people & nobody needed a nice house near a closed plant. The market in San Diego did recover eventually but a bank would have to be prepared to maintain that property & pay taxes for years before selling it at a profit.
During the subprime crisis, the entire US market went down by 30% and in some places sales basically halted for months. Many thousands of people lost homes, and almost all of them had equity on paper before the bubble popped.
Individual actions also matter. Maybe the reason you can’t pay your bank is because you developed a mental illness or drug problem, and they now need to replace a large amount of damage before anyone will pay what you paid.
Those aren’t constant high risks but they are why smart bankers calculate the odds and plan for what they’ll do when something inevitably goes wrong.
You clearly weren’t in the real estate market in 2008, I suggest you google “real estate short sale”.
If you loan someone money to buy a house, you are betting that either they will be able to pay or that the market will appreciate enough that all of the costs of foreclosure and resale will be less than the sale price of the house.
Both things being false at the same time in 2008 ruined Lehman brothers because they had the same thought you’re expressing here. Their gamble didn’t pay off.
This isn't a cryptocurrency problem though. It's a cryptocurrency exchange problem. As you noted, they have essentially reinvented centralized fractional reserve banking with none of the benefits and all of the drawbacks. They're all unregulated banks in disguise.
Cryptocurrencies were meant to put an end to such things. Ironic how corporations ended up reinventing it all on top of crypto. Exchanges are everything that's wrong with this space.
> Exchanges are everything that's wrong with this space.
Exchanges have provided the necessary convenience for mass adoption, providing a way to get your magic beans in exchange for real money without much hassle. Decentralized systems are inherently more complicated than centralized ones and have a harder time gaining traction in the general population (see Mastodon's adoption in the wake of Twitter's turmoil).
> Without them, there's no way for people to buy into the system with real money in the first place!
Of course there is: mining. It's a very simple proceds: fiat => energy => processor => cryptocurrency.
Yet another thing that failed. Everyone was supposed to be able to mine cryptocurrency using their own computers. Instead things got so competitive that massive centralized operations using specialized hardware became the norm.
that's not true. You could be bartering. Or you could be paying for goods and services directly via crypto.
Exchanges are popular because it's easy, and also it allows you to trade _fast_. And then the exchanges figured out that they could be holding onto your cash and/or crypto, rather than, you know, actually be _just_ a location for which exchanges happen.
I'm not a crypto fan, but don't you need/want things like exchanges to provide liquidity in the market? I mean, that kind of service will spring up entirely naturally due to demand for it, so how do you prevent it from just gravitating to "traditional" finance (which similarly evolved the way it did for a reason)?
> Cryptocurrencies were meant to put an end to such things
Yeah, well, Communism was meant to put an end to poverty and class injustice. Brexit was meant to restore glory to Britain. The Catholic Church was mean to put an end to vice. Things don't always do what they say on the tin.
As the Bible puts it: "For every tree is known by its own fruit".
Specifically, if the fruit seems consist of nothing but speculative bubbles and billion dollar frauds then that may be the true nature of the tree.
Crypto is so hard and so intractable that the only way to use it and interact with it for the majority of people is centralized exchanges. In my opinion there's no way to improve that because its all a product of intentional design choices. Centralization and central authority when properly regulated is good. An anarcocapitalist libertarian free-for-all is terrible.
Crypto is Gentoo. Centralized exchanges are macOS. There's a reason about 10 people use Gentoo. Most people couldn't care less about recompiling their kernel by hand every 10 business days even if when you squint at it from across the room it could be better. They just want to use their computer. Ditto people wanting to etch their recovery phrase onto aluminum and hide it under their birdbath. Blaming the user will only get you so far.
> Cryptocurrencies were meant to put an end to such things.
There's a boatload of very good reasons they didn't and won't. I'm not saying they'll disappear, I've been around this space for like 7 years. I know better than to plant the flag. With that said, there's no reason more people will proportionally use crypto in real life - in the fullness of time - than use Gentoo in real life. What that translates to in price, who knows, and frankly who cares?
FTX going under due to magic beans reminds me so much of Lehman Brothers going under in 2008. That time the magic beans were "mortgage backed securities" that somehow took low-quality debt, mixed it up with some magic, and out came high-quality debt, only it didn't.
The problem with MBS was always the zero-sum nature of the alchemy. They took 100 low-quality loans in, and returned 10 high-quality loans, 30 ok-ish loans, and 60 dog-shit loans. No harm no foul, until the dog-shit tranches were marketed as ok-ish, and alchemists believed they we're really creating gold.
I talked to a banker at the time (from BoA I think) and he said these things came about by the banks re-arranging the structure again and again, running it through the risk and credit rating algorithms and then tweaking and retrying until they got something with a good rating. So essentially that's like finding exploits in the other parties risk calculation algorithms or credit rating algorithms until you find some hack that labels crap as gold. So I think of it as hacking basically. The banks figured out how to hack Moody's algorithms, as it were.
Don't forget through all of that madness Moody's was rating utter crap as AAA
CDOs weren't the problem. You see, mixing together dog-shit __ONCE__ isn't that big of a deal.
CDO-squared (CDOs of CDOs) were a problem. If you took those 60 dog-shit loans, mixed them together, and created 10 high quality loans out of them, problems began to occur.
Even then, it wasn't the CDO-squared that collapsed the whole thing. It was the CDS: the "insurance" (so to speak) on the CDO-squared that made things go haywire.
Nested leveraging is a common theme. Each layer is leveraged and but supposedly protected by another layer's risk management.
Go through enough layers and you eventually hit an insurer that has zero chance of being able to cover all of the losses of everyone. It could be CDS of CDOs of CDOs, or coins being backed by other coins.
Thankfully the average person is less affected by crypto losses than mortgages, or in the case of the depression, stocks.
I am fascinated by the number of layers of abstractions built on top of each other in these financial products... Bankers seem to rival programmers in their ability to stack abstractions on top of each other until it is impossible to understand how the underlying system relates to the top layer.
You could say that MBS/CDOs were 'leaky abstractions', and that there were equivalents to 'code smells' to suggest they weren't the golden debt they masqueraded as. I can't think of other professions that develop the same level of abstractions that programmers and bankers create. Layers and layers of inputs and outputs.
Actually AIG and other bond insurers really got the bailouts too.
I remember a guy bragging about helping another firm backdate its books to get bail out money. He was bragging. Still remember his name and how he got his pill head daughter a Cush company paid job in London.
Mortgage-backed securities weren't exactly the problem, it was merely the vehicle in which a trans-Atlantic banking regulation arbitrage trade was carried out, and the trade accidentally became fully self-financing. US mortgage originators and banks were allowed to take risk if they sold it off onto the capital markets, and EU banks were allowed to take risk as long as it was deemed "safe" by ratings agencies.
The truly pernicious part is the self-financing spiral. Banks issued mortgages, which deposit cash in the home seller's account. Seller puts the cash into a money market fund. MMF gets short-term interest by financing AAA-rated securities. EU banks use this financing to buy senior tranches of MBSes. These MBS purchases allow banks to issue more mortgages by freeing up their capitalization.
Like, zero-sum alchemy will only generate small frauds and relatively limited losses. You need large amounts of leverage and some kind of self-financing spiral to generate catastrophic de-leveraging events.
The central MBS problem seemed to be ratings-based-regulation + free-market-unregulated-ratings-agencies.
In hindsight, it should have been structured like government insurance servicers: subject to random and regular audits, with $$$ fines if they turn up anything fishy.
If you don't want corruption, engineer a system where not being corrupt is more profitable...
It feels magical, but that part is actually fine. The senior claims on that combined debt really can be pretty high quality. The junior claims are dogshit though.
There are already a lot of replies, so maybe it is pointless adding my own . . . My understanding of the problem with mortgage backed securities was that the calculations assumed the risks on the low-quality debt was uncorrelated. If that were true, all of the math works out, and there is no problem with mortgage backed securities. The reality was/is, however, that the risks on those loans were, in fact, highly correlated. The conditions that caused one loan to default also made it much more likely that others mixed up in the pot would also default. In that case, the math was wrong and the magic failed. I suppose we could argue all day about whether that was an honest mistake or deliberate manipulation.
It was broken incentives. Give people a financial incentive to do something that can look like an honest mistake in retrospect, and they will make a lot of "honest mistakes".
"Certainly more study is needed on this issue. But the degree to which the Community Reinvestment Act (renewed and strengthened in 1995; see attached chart), the Home Mortgage Disclosure Act and the many other planks of the raft of federal regulation which have built up over the past couple of decades has pushed the banking industry into making the loans for which they are now being criticized is far and away the most under covered aspect of this story. "
"All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money."
Making the subprime loans in the first place doesn't necessitate packing them into opaque financial instruments and going bananas with the wildly over-leveraged profit-seeking.
Financial firms has been making tons of money during decades of increasing wealth inequality. Sure, let's talk about these congressional acts, but not going to put a lot of blame on relatively small programs that required these firms to throw back some scraps.
I'd rather have wealth inequality, which is natural, especially in a world where even the poorest have only gotten richer over time, than have enforced wealth equity, which has resulted in near universal poverty nearly everywhere it's been implemented. People calling for enforced wealth equity don't have the moral high ground. They're in the moral caves and pits!
"The seeds of the financial crisis were planted during years of rock-bottom interest rates and loose lending standards that fueled a housing price bubble in the U.S. and elsewhere.
It began, as usual, with good intentions. Faced with the bursting of the dot-com bubble, a series of corporate accounting scandals, and the September 11 terrorist attacks, the Federal Reserve lowered the federal funds rate from 6.5% in May 2000 to 1% in June 2003.
4
5
The aim was to boost the economy by making money available to businesses and consumers at bargain rates.
e result was an upward spiral in home prices as borrowers took advantage of the low mortgage rates.
6
Even subprime borrowers, those with poor or no credit history, were able to realize the dream of buying a home.
"
The repeated story of our government's behavior in the financial sector is:
1) act with supposedly good intentions
2) Mess everything up
3) Blame the mess on someone else and call for more government action to clean things up.
At what point in the world's history has wealth not been concentrated? What, therefore, is your argument or evidence that wealth inequity isn't natural? Even in video games with an online economy and trade that resets periodically, within a week of a reset you'll see massive disparity in wealth between the top and everyone else that only grows over time. And I mean massive.
You should read "Wealth, Poverty, and Politics." It really is illuminating to learn at an academic level how wealth has been produced throughout history and some reasons why it is distributed unevenly.
What is this magical wealth you speak of? Who is ensuring it, who is guarding it? It’s a game that people play until they feel it gives them a reasonable chance to live. Once that’s gone all bets are off and your magical numbers on a computer don’t mean much.
a: all property that has a money value or an exchangeable value
b: all material objects that have economic utility
I'm not sure what' you're talking about with regards to "ensuring" or "guarding" it. But in general, wealth is produced in various forms by people. That's generally the goal of work! Just as important, wealth decays over time. And, like with everything else in this universe, everything related to the production and maintenance of wealth is unevenly distributed, including:
1) Physical resources
2) knowledge and skills
3) cultural and moral values
4) geopolitical landscape
5) personality and personal productive capacity
6) social circumstances
7) dumb luck
Given that none of this is evenly distributed between individuals, groups, nations, etc., it's absurd to expect wealth to be evenly distributed, even in a hypothetically just world. In fact, based on what we know, we should expect differential wealth to be a simple and indisputable fact of life.
In a functioning economy, people earn money by creating value for others. This generally means that even as the rich get richer, so do the poor. It is hardly disputable that capitalism has done more to lift more people out of poverty than any other economic system. Also, because wealth decays, to maintain wealth one must invest it to produce more of it. It is through this investment that society can benefit as a whole.
The problems with wealth redistribution include:
1) By taking wealth from people who know generally able to best produce it, you reduce their ability to invest wealth to produce more of it. All of society suffers for this as overall wealth decreases for everyone.
2) When giving wealth to people who aren't producing anything, they take the wealth and spend it without creating any more wealth. Overall wealth decreases for everyone. It is hardly disputable that welfare programs in Western countries have led to far more dependence and far more able-bodied people not working than before these programs existed.
It is not an accident that wealth redistribution makes countries poorer, ultimately harming the poor that the redistribution is meant to help. We should be focusing less on wealth equity and more on wealth production and maintenance.
Yeah go tell Jack Ma or any Russian “billionaire” how great their wealth is. There are people (police, army) that ensure ownership is respected. What happens when they refuse to do it? You have such a naive understanding of things I don’t know why I’m even having this discussion.
They're billionares. How much they have and how secure they are in keeping it are not the same thing. Countries with a stronger, more just, and neutral rule of law tend to prosper more than those who don't, all other things being equal. This is just another case of the conditions for maintaining wealth not being equal. I don't understand how anything I say contradicts anything you are saying.
There is no objective wealth. People use money as a record of bookkeeping until it serves them a purpose. Once people feel the system is unfair or they go hungry all your numbers on a screen mean nothing. Once a fascist is elected and everything is nationalized all those numbers mean nothing. Once birthrates drop, once a billion people start migrating, once you piss of somebody with actual power (guns, mob, crony system…) see if your money or a record in some ledger that you own something means anything. Unequality is one of the major signals for a system toppling down, people don’t say well I don’t have money I guess I’ll let my children starve, too bad
I'm not saying wealth == money. Look at my previous definition of wealth. And, I don't think anyone would argue with you that when governments and people take the actions you prescribe, wealth gets destroyed. What many don't realize, is that when you destroy the producers of wealth, you end up shooting yourself in the foot. When Stalin killed all the productive "bourgeoise" farmers, millions died of starvation. When the Spaniards kicked out the productive Jews and stole their property, the net result over time was that Spain became far poorer than before. In fact, what you are describing has happened time and time again throughout history and has resulted in greater poverty for theaggressors every time!
One of the preconditions of the level of prosperity we experience today is government stability and essentially British or Western European laws and cultural and Christian values. As those things erode, prosperity decreases. And, there is a great threat of worldwide prosperity taking a nosedive on many fronts, including the global ESG movement, WEF great reset, socialist/communist/fascist/authoritarian government movements, etc. We are very fortunate to have experienced the overall wealth that we do today, and, unfortunately, it's probably only going to get worse from here the way things are going.
Then don't respond. My goal is to convince you and other readers of something that I believe to be true and valuable to our society. If you have no similar motivation, then there's certainly no reason to respond. You're certainly not going to convince me of anything by making baseless statements like that I'm paraphrasing some non-existent textbook, and then failing to give me, or anyone else, anything meaningful to think about.
That banks extended bad loans under pressure from the government suggests they did so at a loss; otherwise, they would have done it anyway in search of profit. Moreover, Sowell makes bold claims and offers little evidence beyond references to redlining, while the evidence that banks were engaged in unethical and fraudulent practices are backed up by cold-hard data and an abundance of testimony from people within the industry. Sowell's essay is revisionism.
You understand the borrowers weren’t the victims of the fraud —- in fact they were engaged in it. The banks settled on charges of selling securities backed by loans that they had not sufficiently vetted, of which many turned out bad.
The banks issuing the loans weren't the victims of the fraud, either. They were making money hand over fist repackaging and reselling those shitty loans.
The public has been treating their Senators and Representatives like celebrities.
Electoral turnovers flush corruption; we really need to stop being ruled by pudding brains with no skin in the future game who LARP concern while doing nothing but living easy: https://www.nber.org/papers/w29766
I mean, ultimately government == a handful of legislators plus the executive and judicial branches. If you're suggesting we could avoid this by having the right people in office, you are right. But the founders of our government also clearly stated that if men were angels, they wouldn't even need to be governed, and if the government were run by angels, it wouldn't need to be limited, nor would it need checks and balances. We've forgotten this lesson over and over as our government continues to grow and remove checks against its power.
Right so it's the government's fault for encouraging the corporations to do something they didn't really want to do, which inevitably led to the corporations naked inhuman amoral greed running amock.
Do you think there was a sea change in the base level of greed in the run up to the financial crisis? (Remembering of course that it’s impossible for a corporation to be greedy, only a human being can be so.)
I’ve been beating this drum for more than 10 years. The big story of the financial crisis is that while there was fraud and corruption at the margins, the bulk of the economic dislocation was caused by well intentioned people making good faith decisions that in hindsight proved very foolish. People who had no business buying a home or taking out that loan were. Banks were making the loans not just because there was a global capital glut chasing returns, the credit tranching structures were working, and the ever rising house prices hid any risk. No one in the industry had seen house prices broadly go down in generations. In retrospect there were a number of systemic issues that now seem obvious, but having been there it wasn’t that obvious at the time.
the bulk of the economic dislocation was caused by well intentioned people making good faith decisions that in hindsight proved very foolish
I agree with that. But that comes about because we've arranged our economic activity into monolithic 'corporations' that are immortal, have the legal status of persons, and are compelled to chase shortsighted profit above all else, show no remorse, and any moral wrongdoing is just a slight financial risk to be approached like any other monetary risk.
All the humans working for the oil industry today are making good faith decisions but together they work for a massive unstoppable inhuman juggernaut that is destroying our climate while fighting every attempt to rein it in with every means possible at its disposal.
And yes I can call corporations greedy. They have demanded to be treated as people in the courts of law so I'll judge them as people
Here's the thing. Most corporations today believe in "stakeholder" capitalism . Most follow ESG. This means they explicitly state that they are not all about profit but instead also about making the world a "better" place. And what is the result of that? I would argue that corporations are now more evil than ever.
Capitalism is great, but it only works when founded on a strong moral framework. Christianity served that purpose for the history of capitalism. However, once you abandon or corrupt your morality, then you'll see the majority of corporations do evil things, no matter whether they claim to only care about profits, or whether they claim that they also want to save the environment and bring about equity, inclusivity, or whatever Marxist Utopian ideal is in vogue at the moment.
That’s why I hate when people in these discussions refer to needing/providing “liquidity”. It feels like such a weasel word. Unless you know enough to conclude it’s really a cash flow mismatch, then don’t mince words or overcomplicate it.
Money. They need some g/d m/fing money. Maybe they need it as arms-length loans on legitimately illiquid capital. Maybe they need underpriced loans for the risk of the business. Maybe they just need a giant dump of free cash.
But it’s money they need. To weasel it away as “liquidity” is to assume something you probably have no way of knowing until later.
It was particularly dubious in the case of FTX, whose assets were in popular cryptocurrencies, which are traded every millisecond. You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be.
“No, no, the fair market price is actually much higher, it’s just that there’s only one guy who would actually buy it all right now!” No. Stop. We already have a word for an asset that exactly one person wants to pay a positive price for: worthless (because they only have to outbid everyone else).
I agree "liquidity" is a cop out implying they need time to sell things.
In my case I deposited some USDC coins and have asked them to return said USDC coins but it seems no. I think theft is a more accurate term. As in we stole some customer funds to gamble with and having lost them need more funds to cover it up. Not really "liquidity".
There is a reason stablecoins are not the same as fiat in a deposit account: a government will make you whole via deposit insurance if something happens to your USD due to institutional failure.
This is somewhere between a gross oversimplification and wrong. Sure, most problems can be solved by “money” — if someone just gave FTX $10bn in the form of a wire, they’d probably be fine. But this misses the point.
If a bank holds short term debt, due in one week, but a customer is withdrawing funds now, the bank needs liquidity — they need dollars today, and all they have is dollars next week. If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money. There are many ways a financial company can fail, and lumping them all together as “money” loses all nuance and understanding.
I thought my comment made clear that liquidity is a valid concept, and there are valid times to bring it up -- just that most usages in these crises are by people who are throwing the term around hastily, without sufficient basis to isolate liquidity per se as "the problem".
If you agree with that, you're agreeing with my original comment, even and especially if you (correctly) believe that some problems are rightly called "liquidity crises".
As it turns out, FTX was not merely illiquid; no amount of time or low-interest loans would have coordinated the cash flows, and yet every apologist was happy to identify the core deficiency as one of "liquidity", rather than honestly say what they could reasonably have known, at the time, from their perspective: no money, with specifics to be filled in later.
>If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money.
Even granting the tenuous propositions that Bitcoin isn't a money nor could be purchased therewith, the right diagnosis still wouldn't be "they don't have enough liquidity", but rather "they don't have enough Bitcoin", since the former is specifically making a (bold, overconfident) assertion that the exchange is good for the money if only they could get a few loans. That assertion was false, and almost certainly lacked sufficient basis from its proponent even at the time.
Liquidity means something though. Think of a bank. If everyone withdraws their funds at the same time they may not have the liquidity to pay out. In order to be able to pay out everyone at the same time, they would need to keep it all uninvested/unlent, and then charge you a banking fee instead of paying you interest on it. So there is a tradeoff there.
> You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be.
this is extremely stupid. you can't just sell arbitrary amounts of coin without moving the market a ton and paying a fortune in slippage. they do need liquidity.
You are strengthening their point though. It now becomes:
You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago, actually scratch that, it even worse, it is that price MINUS SLIPPAGE! Just not at the price you need it to be.
So if I go to the loan shark, borrow money and stick it on a donkey the 10:15, if I get lucky and the donkey wins, I was just illiquid, but if he collapses half way around the course, I was actually insolvent.
> The problem is that FTX took its customers’ money and traded it for a pile of magic beans
Yup. Just yet another bank leveraging its fractional reserve. They just can't resist, can they? Actually I'm not even sure they're fractional in the case of cryptocurrency exchanges. Wouldn't be surprised if they were gambling with their entire reserves.
Yet another asset custodian that wasnt happy to only make a billion a year so pretended to be a bank pretending to be an investor while actually just being a degenerate gambler with a hooker, blow, yacht and team / stadium naming rights buying problem.
The NFTs of 1997: "etoy shares compel people to think about the elusive and amorphous nature of Internet art. One of the many controversies about Net art is that there is no original copy; an artist can’t exactly “sell” a home page to a collector. The “shares” play with the idea of ownership and the Net, as well as spoof absurdly overvalued Net stock" ;)
"In 2001, Flooz.com was notified by the Federal Bureau of Investigation that a Russian-Filipino organized crime syndicate used $300,000 worth of Flooz and stolen credit card numbers as part of a money-laundering scheme, in which stolen credit cards were used to purchase currency and then redeemed.[2][3] Levitan has stated that fraudulent purchases accounted for 19% of consumer credit card transactions by mid-2001."
What's even more funny is that Binance make it look like they are a stable financial institution, and it's thanks to their high standards that they won't acquire FTX.
Binance is most probably much more of a fraud than FTX.
Binance doesn't even have physical headquarters in any country in this world - and the reason is that they are being actively investigated or banned almost everywhere.
I don't know about it, Binance has become a gold standard in crypto exchange business. Here on HN it was always about Coinbase likely because its an American company but for the rest of the world, it's all about Binance and the rest of the world is huge. How huge? About an order of magnitude to Coinbase.
FTX was #2 globally. Binance is #1. I'm not sure exactly what ranking mechanism is used to determine that, but that seems to be consensus from a variety of sources.
I've never even heard of FTX and I've been in the crypto space for many years. Binance however was always near the top since it came out. There was one american exchange that used to be nr.1 but became irrelevant after they weren't allowed to serve non-americans anymore. I can't remember the name and it isn't in the top 300 anymore, maybe they had to shut down.
EDIT: I just checked and FTX was only founded 3 years ago
I hate to gatekeep, but I find it pretty impossible that you are "in the crypto space" in any meaningful sense but somehow have not heard of FTX. That's like being "in the crypto space" but not knowing what Ethereum is.
Unfortunately I can echo the crypto space sentiment for as long as such an expression can exist
I’ve never touched Bitfinex/FTX/Binance or any exchange that allows options or leverage. I am a US citizen. Bitstamp Gemini or Coinbase are the only ones I’ll touch
And I’m pissed off that coinbase removed the BTC/USDC trading pair because it had low volume
Why will I not touch them? That’s a long story but I see history repeating itself - fractional reserve Bitcoin banks paying ponzi interest
Kraken I trust but I've never used. For perspective, I've traded roughly a million dollars worth of BTC specifically. Most of that was as the knife was falling after the 2017/2018 ATH.
DCA-ing since then, selloff at the top in 2021, pull my limit sell orders, let it crash.
Doing it again now, kinda hard not to take advantage of deflationary 4-year super cycles
Never heard of FTX either until this whole implosion happened. I’m certainly not super active in crypto, but it seems to me there are worlds between Binance and FTX.
Binance does have significantly lower trading fees than coinbase - so while they do have about 8x the trade volume, it's not exactly an apples to apples comparison, because lower fees mean tighter spreads and more money bouncing around within the system per unit of (deposit -> withdrawal in different currency)
So, I'm not sure "an order of magnitude larger" is necessarily an accurate description. Wouldn't say it's inaccurate either, but just missing some nuance.
mtgox was bigger too. There are other reasons for a crypto winter like high interest rates and a newly credible us central bank.
Rest of the world is not bigger when it comes to non residential real estate: private equity, venture, tech, finance.
Europe is usually CardMarket. In the US TCGPlayer seems the most popular with CardKingdom behind them. I've used both TCGPlayer and CardKingdom on the buy side without issues, but you can also list cards for sale (no idea what the process is like).
If you want to get maximum value in exchange for doing more legwork and probably assuming more risk, Ebay or Facebook groups.
It’s interesting because it is wrong. MtGox had far larger dominance in crypto trading than Binance, flopped significantly, and it didn’t prevent crypto from coming back.
I don’t know much about the topic and sometimes I get confused with the concepts crypto, currency, non fungible, token and I call it asset asset to generalize. So, what makes a crypto to be a crypto?
That's just the label, nothing decentralised is left. See, as it turns out, to trade you need to find people and people are found in central locations. Okay, there are still many exchanges but this is mostly incidental and it makes sense to end up with single exchange eventually.
I'm enjoying the irony that practical crypto could not possibly be less like an decentralised peer-to-peer system for exchanging value if it tried to be.
As you soon as someone creates an exchange - and especially as soon as they start packaging funds into absolutely any kind of financial instrument/service - they've effectively reinvented deregulated banking with no deposit protection and extra risk.
Don't let the schadenfreude and confirmation bias get to you. Centralized exchanges never had anything to do with the value proposition of cryptocurrency. And trading on them is just speculation with no relation to crypto. It's what gets views in the press, though.
Whenever news like these occur there is always a bunch of "I knew it would all fall down" self-validation comments in HN. Yet it really doesn't fall down, after over a decade. Perhaps it's time to consider that you are looking at the wrong thing and barking at the wrong tree.
Of all these collapses there is 0 decentralized exchanges (i.e. on-chain) involved. Pretty much because they can't, by design. That's the value proposition. Unstoppable exchanges, transparent, publicly verifiable, highest availability.
What you have seen all this year is more and more validation that centralized finance is problematic by design (3AC, Celsius, BlockFi, FTX...) while decentralized finance comes unscathed (Uniswap, Aave, Curve, MakerDAO...).
and additionally who run these exchange has no economical background whatsoever. Like an ignorant trying to reinvent the wheel into a squared one and poaching it as a new invention.
Correct until the last I think. Every exchange is looking international because they know what you’re saying too. If Binance goes, there’s a mix of enough international toeholds from regulated exchanges and enough defi to keep the markets live.
All exchanges suffer the same fate. There is just no reason for exchanges to be solvent. The industry is unregulated and there is too much money to be made. Binace will go. Coinbase will go.
I believe "crypto" will always be around. It's an MLM for the digital age. It will always be nonsense.
The only way to make a buck is for someone else to lose a buck. There's nothing else in the exchange here so it's just perverse.
But I wouldn't call people idiots that invest but uninformed and/or desperate and/or uncaring. If someone has an extra $1000 in the bank they think what's the worst that can happen? It's a mistake but you can see how these exchanges are worth billions all of a sudden and the dollars being pulled in to make these billionaires have to come from someone else.
They are banned mainly because they like to skirt KYC and similar regulations. It doesn't mean their financial engineering is poor. Those two issues are completely orthogonal.
Binance KYC's process is a joke. I've been using them for years, suddenly they needed more KYC and their automated process failed me more than 4 times in couple of months.
Glad they failed me though, life turned out pretty great without me gambling on
meme coins.
The question in my mind with Binance is how reliant they are on BTC. The non-BNB part of their SAFU (a pair of wallets they call an emergency insurance fund) is roughly half BTC, the other half being BUSD which I wouldn't 100% trust if Binance was in trouble. Could they survive a FTX-style panic if BTC had dropped below $10k? I hope so, at least.
Tl;Dr: Paxos issues something called BUSD on Ethereum, which is regulated. Binance issues something that's kinda sorta related but not really, that's fully unregulated, only usable in their private chain, ALSO called BUSD, that is just monopoly money. They happen to have the same name, but hey, you fell for it!
Related quote from the link:
"Paxos issues two US dollar-backed stablecoins – Pax Dollar (USDP) and Binance USD (BUSD) – that are overseen by the NYDFS. These two tokens are very similar in design and reserve operations because they are regulated. Paxos and NYDFS agreed to the terms of the token in advance of issuing – this includes the stipulation that USDP and BUSD only be issued by Paxos on the ethereum blockchain at this time.
Our marketing partner for BUSD – Binance – issues a token on its BNB smart chain called Binance-Peg BUSD ... Note that Binance-Peg BUSD is strictly a Binance product; it is not issued by Paxos nor regulated by the NYDFS."
Thank you for your smell comment. I am a nerd with bad hygiene, but people do not bring it up that often.
Binance pegged USD is not printed out of thin air. It is a bridged token from Ethereum to other blockchains. Because how smart contracts work, Binance cannot manipulate Binance pegged USD supply unless they seriously break BNB Chain.
If you do not believe this web page, you can also run your own node and ask it directly using JSON-RPC API.
Thus any Binance pegged USD (and other bridged tokens) are 1:1 backed by matching token on Ethereum chain. Binance pegged USD is not different from any other bridged token on other bridges and chains and there is no reason to suspect any foul play here.
Because it is transparent and on-chain there cannot be fraud. There could be, however, technical issues and hacks with the bridges.
The reason why Paxos do not directly issue tokens on other chains is that they 1) likely do not have infrastructure for it yet 2) they are limited by commercial agreements or agreements with a regulator.
"The reason why Paxos do not directly issue tokens on other chains is that they 1) likely do not have infrastructure for it yet 2) they are limited by commercial agreements or agreements with a regulator."
Yet ? We are talking multiple tens of Billions of $ and supposedly they don't have infrastructure YET ?
I don't know anything about the coin itself, but all of this sure smells like the small print that some will find very relevant when the time comes.
Ethereum is the standard for ERC-20 Tokens. It's not hard to get a TRC-20 (Tron) token up and running, but a more careful company might not consider it.
> Yet ? We are talking multiple tens of Billions of $ and supposedly they don't have infrastructure YET ?
These up billions of $$ of customers money which they make a kind of commission on. The commission is not going to be billions but rather millions; and crypto/blockchain infrastructure/developers are very expensive.
Why does anyone trust Binance either? They’re notoriously shady about where they operate and what assets they actually hold, to the point that they’re officially not headquartered anywhere.
If you have $100k at Binance, is there any reason to believe you could withdraw it tomorrow? Any contract you may have with Binance is made with a local shell company that could just as well be a hot dog stand. Any money you’ve sent them is effectively nowhere.
FTX was supposed to be above the board and they collapsed in a day. A few months ago FTX was the white knight buying out distressed crypto companies. Why would Binance do any better?
Why did anyone trust FTX either? The trust was really based on the credibility of the person running it, and the fact they had bailed out some other failing exchanges. But there were no hard facts.
In fact it seemed like all it took was a public quarrel with the founder of another exchange to start the ball rolling toward total collapse -- again, because it was all based on personal credibility.
You can think that crypto is absolutely worthless. But then an exchange is like a casino, earning fees on other people's gambling. There's no reason for the casino to go bankrupt, unless...there's fraud going on.
Yeah but that's not the situation. If you have a bitcoin you can sell it to another person for several thousand real US dollars. Even if you hate crypto it has that value to it. I mean re "about 0.00001%" I've bought and sold bitcoin myself and usually for actual money.
True there isn't much intrinsic value to the 0s and 1s making up a bitcoin but there aren't much to the the 0s and 1s making up the US$ or similar in your bank account.
They’re worth something today because people want them today. If they don’t have any real-world yield, that doesn’t make them worth anything tomorrow. As FTT just demonstrated, like so many have before.
Crypto is worth something in that it can be sold at a higher price. USD is worth something in that at the point where it isn't you already have much bigger problems
> the fact they had bailed out some other failing exchanges
That happened after they were buying stadiums and had a Larry David spot on the superbowl. They were the archetypal dumb money, top of the bubble, company. No one should be surprised they couldn’t handle a financial stress test. Sam was great at PR and maybe not much else?
This year this guy has been on every major podcast being touted as a genius philanthropist / “good” capitalist. Remember he just crashed TWO companies. Alameda and FTX. The bubble keeps popping. I’m curious who’s next. This almost certainly will ripple beyond crypto to general tech companies given how.. all the top VCs have billion dollar funds in crypto as my “exhibit A”
They slowly built/clean their reputation, bitcoin going up to 70k made everyone just forget the past.
But yeah, they are probally the most shady ones, but the fact they actually have no offices and no govs after them, makes it easier to hide your operations, its the same for tether that has managed to get so big with absolutely no offices, no employees or anything.
The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity.
Similarly, Sam's fund Alameda was delta-neutral until some time in 2021, which is something that also could have profitably continued in perpetuity, but they got greedy and started making directional bets with leverage.
There’s a Bloomberg article that goes over why this is a bit more nuanced than “gambling with customers funds”. In short, it’s either one or both of poor risk management ( margin traders can’t post collateral and the collateral they had was FTT which went to zero ) and black swan bank runs ( Binance CEO tweets about risky FTT causing bank run causing further drops ). In fact “gambling with customer funds” was by design. Coinbase, to their credit, lost business to the cexes and FTXs for not allowing derivative and defi lending / margin trading. So the customers should have known the fatalistic game they played.
>In fact “gambling with customer funds” was by design.
This is not accurate. The ToS for FTX explicitly said that customer funds would not be used for investment purposes. While it didn't explicitly say it wouldn't be used for lending, it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis.
It is widely believed now that Alameda went deep underwater during the collapse of the Luna ponzi (this one was quite literally structured like a ponzi) and borrowed a large amount from FTX to bail themselves out of it. In the wake of this, FTX had a shortage of hard assets and a fat bag of FTT that the loan was issued against, which is what exposed them acutely to a bank run and/or price decrease in FTT.
Right so they didn’t invest customer assets, they just loaned them to themselves in exchange for their own token so that they could invest the customer assets.
Folks who have been in the industry for 10 years, many very publicly cynical, had assets on FTX. It was viewed by many as the safest CEX in the industry.
I'm a bit more paranoid, so I maintain self-custody 100% of the time unless I'm using an on/off-ramp, but some very bright, very oldschool folks got caught up in this one.
The issue wasn't the bank run. FTX could just have halted withdrawals, CEX do it all the time. The issue was FTT collaterized loans or equivalent, because they gambled too hard. And I doubt their users were aware of the risks, sBF himself guaranteed on Twitter the day before.
Bank runs are wrong for exchanges. They never should have fractional reserves.
And derivative trading shouldn’t be based on lending out customer funds. The exchange should lend out their own funds. They charge a lot of interest for the leverage, and they don’t even take the risk on their own money?
FWIW you can subscribe to Matt Levine’s column as email newsletter without being a Bloomberg subscriber. (That doesn’t help for reading already-published columns, but of course there are other ways around paywalls.)
No, FTX was making bank in fees. They just got greedy and loaned customer funds the SBF’s hedge fund to gamble with. Hedge fund went bust and now the loans default and the collateral which was just funny money to begin with is worthless.
If you believe FTX at all. These companies are riddled with fraud. Nothing they say or have said can be trusted (including reported earnings), and Tether and Binance will be next to collapse, at which point the ecosystem around Bitcoin will implode.
>The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity.
Where were their profits derived? Was it from taking their slice of every transaction? Or selling their freshly minted coins? If it was the latter, that only works for so long, just ask the Fed.
They started AS Alameda and THEN made an exchange to facilitate their trades. They did not exist for any other purpose than doing the good old Tether + Bitfinex = iFinex.
What always surprises me why does anyone feel the need to steal from users when you are literally "the house" - you are taking a fee on every transaction. Just like in poker - if you are the house, you don't need to take risk by playing at the tables.
FTX was probably hugely profitable before they started stealing.
I’m not sure what you mean by this exactly. Many of the things they said to the public are not true, but these currencies use permanent, public ledgers, so you can see where the money goes if you look carefully.
How is that particularly relevant? Data isn't knowledge. Just because some assets have public records doesn't really tell you anything about liabilities or underlying ownership.
Exchanges could practice provable solvency ( https://eprint.iacr.org/2015/1008.pdf ), but they aggressively do not-- in part because they don't want to bring customers attention to the potential issue (and they rightfully reason that once customers are concerned no amount of technical solution will likely satisfy them).
But FTX wasn't really an exchange-- it was a scamcoin casino primarily trading in highly leveraged proxy assets ("perpetuals") as a bucketshop.
How can the provable solvency scheme possible prove solvency for fiat holdings? For example, I deposit $100 into the exchange. How can the exchange prove to me that it hasn't gone and gambled that $100? I think this could only be handled with human auditors going in and checking the actual amounts held in the exchange's bank accounts.
Can't, except as you note. Best trade your fiat for something actually auditable through cryptographic means ASAP. :)
(for a less quippy answer: they could show their fiat liabilities through these means and have a third party bank attest to their fiat account assets (or an encryption of their fiat assets). At least then you'd be trusting some established bank and not just some sketchy cryptocurrency industry company)
LTCM actually was doing a lot of the risk management people later said they should do. Their problem was the trades they were doing were more crowded than the realized and they couldn't unwind them cheaply because everyone else was doing the same thing. Plus once people realized they were struggling other market participants started betting against them. There have been other similar situations since then. In August 2007 most of the big quant funds lost double digit percentages in a few days when someone had to unwind a portfolio and statarb strategies stopped working.
That's the point. Their models showed their strategies to be safe, while in reality, their strategy was risky enough to bankrupt the fund, and scare the entire financial system.
> In August 2007 most of the big quant funds lost double digit percentages in a few days when someone had to unwind a portfolio and statarb strategies stopped working.
If your strategy works for years and then a single event erases all the historical profits and puts you in the red, your strategy always sucked because it ignored tail events.
legends say they could have been saved by Warren Buffet, who was interested to buy them at a certain price, but the deal never went on bcs he was in vacation where satellite phone wasnt working.
wikipedia says he turned it down due to risks involved
They held a huge supply of an illiquid asset that they made the market on. No surprise that they would offer a high price and then say "these are worth a lot." This happened with beanie baby sellers: they would corner the market on one model and the jack the price. The problem is that nobody else thought they were worth that much.
Then, FTX made it worse by allowing people to borrow against them at the valuation of "a lot," and borrowing against them at the same valuation.
The core of the issue here was not ponzinomics, it was the exchange gambling directly with user funds, by way of unsecured loans to a hedge fund controlled by the founders.
Fraud? Yes. But users weren’t buying into a ponzi, they were using a centralized exchange product with the understanding that reserves were whole, when in reality they were secretly fractional reserves.
CZ knew about the bad leverage to begin with, which is why he tweeted about selling all of the FTT
What are the chances he never intended to buy FTX, just to destroy it after their public back and forth? It's almost like a reverse Musk - he sent a purchase offer with an option to back out no matter what
CZ knew from day 1 all he needed to do was crash FTT just enough, and the rest would happen organically
I called it and saw many others call it too. Cause a run on FTX, get due diligence and say it’s F**ed, and get their user-base for free.
My concern is how much funding FTX and SBF in particular were giving to EA/AGI Safety research labs and charities. There’s going to be some significant knock on effects there when the money is no longer available.
What user base? FTX is unable to process withdrawals right now (and who knows if they ever will be), so the money's gone meaning users won't simply migrate to Binance.
CZ seems like a genius, but I'm sure he's panicking now, he doesn't benefit from killing the whole alt-coin world - which increasingly looks like happening.
I think FTX was a very big threat to Binance AND the whole crypto ecosystem. After making sure everything was or could become (practically, at any other event where FTT would crash) insolvent under the hood, CZ went on and killed FTX and actually saved a MUCH, MUCH bigger industry collapse that was impending as FTX went bigger and bigger.
Not to defend him and I also agree that Binance benefited by killing its biggest enemy while still suffering himself as industry collapsed, but if this event didn't happen today, much worse would have happened in the future affecting literally everyone much worse.
This seems hysterically optimistic. The current crash is not going to stop with FTX, it's already crashing Solana, BTC, etc. And if Binance themselves and/or Tether come tumbling down, there will be absolute carnage in the markets.
Seems pretty likely. The moment FTX publicly accepted the buyout idea they were doomed as a company, it wouldn't have mattered if Binance actually bought them after that.
Just a PSA for any FTX users out there: please make sure you get details of your balances, deposits, withdrawals and trade history whilst the site is still up.
You can download it as a CSV - I'd also take screenshots to be on the safe side.
Save yourself a potential headache when you come to do your taxes down the line.
^ This I had sparse information for the first OG BTC lending website and that information would’ve been super useful to all sorts of three letter authorities in retrospect. It was only $7500 at the time but that has slightly ballooned over the years
It's amazing how all of this was based on personal credibility, and a single Tweet caused the death spiral to start.
Wells Fargo isn't going to go out of business if the CEO of Bank of America insults it on Twitter. But even if it did, there is FDIC insurance for deposits, and nobody whose balances were under the insurance limits will lose a penny.
FTX succeeded solely based on the reputation and personal credibility of its founder. One tweet from the CEO of a rival exchange and the whole thing came crashing down, taking a significant bite out of the value of many cryptocurrencies. So, even people who didn't have accounts at FTX are hurt by their assets losing value.
It's not based on personal credibility, it's based on regulation. Wells Fargo wouldn't collapse because it's regulated and has some actual provable guardrails in place.
No surprise whatsoever. They killed a competitor, avoided being on the hook for ~$6B in missing funds and without paying anything they are basically inheriting all FTX customers still happy to trade crypto. FTX or whatever is left will be under massive legal scrutiny for years to come. The "institutional investors" they were attracting and lobbying for are the kind of folks you don't want legal battles with.
Meanwhile, FTX is still operating (!), accepting new users and accepting customer deposits even though it is insolvent. If you haven't been following the crypto news much or aren't on Twitter, you will have received ZERO direct communication from FTX that they are insolvent (not even an email). This is coming from someone who went on the record[0] trying to lobby, blaming the financial industry for lack of transparency and taking on too much risk and publicly lying that FTX doesn't use customer funds to trade (tweets have since been deleted)[1]
The funny thing is for six months I have been checking FTX for open developer positions. Thinking surely, the best place in crypto must be hiring good devs like me. And there have been no postings at all! And word on the street is their devs actually building the exchange made a middling salary with zero stock. I always found it odd, how could they not be hiring? even during the downturn? And now I know why, it was all a scam.
That's not what I have heard. Specifically know people who have gotten offers, mostly in the 150k range with zero stock. Alameda research is also just random devs that went to MIT with a few years experience. Impressive to go to that school, but clearly not experienced enough to run a real finance operation. Zero real finance people.
If they were serious they would have hired portfolio managers with decades of experience.
Its the same thing as three arrows capital, random people ending up with a bunch of capital, overestimating their intelligence due to a bull market run, and ending up with nothing
Debate old as time. I agree with you but this happens every cycle. RenTech doesn't have "real finance people" either. Maybe the problem was that they just had the wrong people, not their level of realness.
And Alameda seemed to be mainly people from Jane Street? There is a difference between trading firms with good tech (Jane Street) and firms taking prop risk (DE Shaw)...just based on what has been released, I agree that they didn't seem to know what they were doing. Unfortunately, the market doesn't know you went to MIT.
And they wouldn't have hired PMs with decades of experience, because no PM with decades of experience would have worked there.
DE Shaw takes directional risk. They have a lot of conventional strategies iirc (distressed debt, credit, etc.). Jane Street does a lot of ETF AP and other strategies that optimize for technology (afaik).
Alameda is/was strategies that optimize for technology, arbitrage etc. But with a massive one way directional long bet over the top.
Run by people with 1-2 years experience in shops that run a market neutral profile , in an environment where they believed the underlying asset goes up every single day.
I've worked with a crypto trading firm before, one of FTX's otc clients. In that industry we hire based on referrals and rarely on credentials. A trustworthy person who earns the company $0 is worth more than an unvetted one that could stab the company in the back anytime in the future.
Is NYSE a scam? Is Euronext a scam? The exchange was a legit business that was profitable...outside of fixed costs, it isn't possible to lose money with an exchange. But they were doing other stuff (broking) that did lose them money. These are two completely distinct operations though (in real finance, they are largely distinct).
As Matt Levine mentioned in his article today, no responsible bank would allow you to borrow money and give them shares of their own stock as collateral. In some cases it's illegal to do so, but even when it's legal, banks would not want the risk.
FTX, on the other hand, pretty much did just that.
Does that make FTX a scam? No. But when they told their customers they don't gamble with customer deposits, that was at least incomplete and misleading, and may have crossed the line into being intentionally deceptive.
Of course, even if people knew about this, they probably would have used FTX anyway because people do crazy things in a bubble market.
Right, but irresponsible banks have done that before and, at the very least, that is self-liquidating on the way down (the same with companies issuing stock to employees).
And whether they are gambling with your money or not, they were a mix of a bank and an exchange...so the comparison with a bank isn't complete. They were booking derivatives trades so your money is 100% at-risk, irregardless of what they do with customer deposits. This is what prime brokers do (as Levine says in that article).
The reason you don't lend against your own shares is because you won't be able to get financing and are exposed to runs. It is unrelated to the point about customers who were already at risk because they were trading derivatives issued by FTX.
FTX fucked up big time, but if they didn’t allow alemeda to siphon all the customer funds away they’d still be chugging along just fine. The issue is Sam used it as his hedge funds piggy bank.
> outside of fixed costs, it isn't possible to lose money with an exchange
It is, e.g., if the fees on the average transaction are lower than your variable costs. It is just extremely improbable for that to occur accidentally.
They just hire people from other places, cheaper labor, I know at least 4 southamericans who worked for them in the past, 100% remote, same talent as an US dev, and 1/4 of the cost
Potentially dumb question here; I am no expert on crypto or finance.
Isn't the collapse of FTX in some ways evidence in favor of decentralized currency rather than against it? As evidenced by 2008, firms gambling with other people's money doesn't seem to be specific to DeFi.
If coin exchanges had some legal obligation to just be wallet and marketplace services instead of investment engines, could that help prevent this sort of fiasco (and the 2008 one) happening in the future? On the other hand, perhaps this solution could be equally applicable to traditional banks.
DeFi had no problems throughout these past few days. No Dex ever had withdrawals/transactions take longer than seconds, as always. No Dex ever used user funds secretly (impossible on a public ledger), etc.
The lesson here is that TradFi is not safe. Not your keys, not your coins.
It's not a dumb question. You're right that it's absolutely an argument for DeFi, but it comes with tradeoffs:
- Bugs in the code means all capital may be lost. That's potentially worse.
- The profit margins aren't nearly as high. If you're a centralized entity or a bank you can do all kinds of shady stuff behind the scenes with customer funds to fill your own pockets. It has happened over and over again both in TradFi and CeFi. In DeFi, you can't do that since it's fully transparent and backed. Good for the consumer, but not not as good for business growth. Many traditional finance entities have become as big as they are because they did shady stuff but didn't get caught. I'm just not talking about crypto exchanges here, but also traditional banks.
That's the problem, though. Crypto has wild gains because it's an unregulated wild west. And for the same reason it's full of pyramid schemes etc. As soon as you regulate, you fix the problems but head to centralisation and it becomes a boring service without big profits.
evidence for you, and i (though i’d argue it’s transparency more than decentralization that matters in this case), but that’s certainly not the widespread sentiment. consider also the number of non-custodial failures in this space ranging all the way back to The DAO. at the end of the day, Tether market cap is and has been >> Dai market cap for almost its entire existence. that tells you all you need to know.
From reports I've heard floating around, Alameda was making >$1M per day doing their good ol' prop trading. If that's true (and that's a big if) then all SBF had to do was simply stick to the playbook. Do you prop trading on the side, help customers transact crypto via FTX.
This is not DeFi. This is CeFi that caters to crypto. The major DeFi apps have had no problems this cycle.
So perhaps not surprisingly, Uniswap - which is a preeminent DeFi app - now has deeper liquidity on many important trading pairs than the largest CEXes:
Some how a bunch of cex's behind the doors lending ops now is defi?
Meanwhile, some how magic internet money (abracadabra.money), with people bitching about their bad debt on chain for months is still solvent, while ftx is dumpsterfire...
It seems clearer that FTX (and Alameda) ran off the cliff following the SOL/Anchor/Celsius debacle, and this (and Binance's involvement) is really only the splat of them hitting the ground.
SBF was one of the biggest political donors to the party in govt. He seems to have done all the shady stuff with Alameda (and said it was arms-length). And whilst Alameda's CEO said multiple things that would have got you in trouble with regulated products (saying they had $10bn in secret assets, making a public offer to buy FTT to manipulate the price)...this is crypto.
I will make an exception to this: if they do not manage to make everyone whole or if there is public outrage that overwhelms his purchased politicians then it is over and multiple people will do time.
If and after cryptocurrency becomes deeply intertwined with the economy (like Banks), I wonder bailouts would be the norm besides relatively inconsequential jail times?
I wonder what's going on / will happen in countries where governments (or citizens en masse) have endorsed / adopted cryptocurrencies?
I personally hope that there will never be bailouts for crypto. Satoshi created Bitcoin out of the hate on Fed bailing out irresponsible banks and financial institutions. I don’t want the irony.
I certainly have no faith in crypto. The returns look nice but I know i'm not informed enough to get out while the getting's good so I'll have to pass.
Honestly, I think this is a really dumb move by Binance. They have taken a look under the hood, determined that FTX is bankrupt and then told everyone that is the case. Now there's going to be a widespread crypto panic that is going to cause other exchanges to collapse, and ultimately I expect Binance too will go down.
Charles Dickens words in, A Tale of Two Cities describes the cryptospace (at least for the past couple of months perfectly):
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way--in short, the period was so far like the present period that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
Why waste money on something that is burning out anyways? Also conveniently mentioning "potential", they really want to make sure people understand that there never was anything binding going on.
This whole thing is such a mess. Binance's statement is quite scathing. It is a shame that crypto institutions continue to fold after mismanagement. The free money era will sure take a couple more entities with it.
The Wall Street Journal in its report quoted Binance as saying: "Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help."
Maybe people will finally get some sense and stop storing their wealth in digital currency that is backed by absolutely nothing. I think a lot of dominoes are about to fall in the crypto world
At present no major currency is backed by anything material but trust. USD, for example, is only viable because, at the deepest level, trust in it is enforced by US army. There are three major class of people who need digital currency: (1) who are super rich and won't care about putting their 1% of wealth for "diversify and forget", (2) who need to transfer money eyes off from governments, (3) people who need alternative to be manipulated away from US fed. As long as there exist a group of people needing digital currency there is an intrinsic value assigned to that currency.
Yeah but like, the US is a lot more likely to be around in 20 years, so this argument doesn't really make any sense.
Honestly I'm sick of hearing it; yes we know, all money is made up, that's not an interesting point anymore. Society is okay with that, but it doesn't mean you can just make up another currency, that's not how it works.
That's exactly how it works. When you issue IOU, you issue your own currency. When a company issues stock, they are in fact issuing their own currency. All contracts are in fact a currency that can be sold, bought, invested and transacted. World debt is far far larger than actually currency in circulation. How does that happen? Because we make up "currency" all the time.
No, contracts are not currencies. The whole point of distinguishing between currencies and other securities/debt is that a currency has the property of being a widely used medium of exchange.
The contract I have with my plumber to plumb my toilet is not something you can use to buy lunch.
No, that's not the same thing at all. For every other example of currency besides the government's currency, there's a tangible thing backing that unit.
Crypto still doesn't have that, and that matters. To what degree is up for debate, but it does matter. Only governments apparently can get away with the unbacked currency, because they otherwise back it with enforced societal rules (a.k.a. laws).
Money, to be useful is what Economists call three things;
♦ A Unit of Account
♦ A Unit of Exchange
♦ A Store of Value: A hedge against uncertainty
Crypto is not money, so what is it? Is what the Chinese Central Bank characterized three years ago as Digital Gambling Asset
What other currencies are there in todays world other than fiat (government's currency back by nothing)? I was trying to think of something other than crypto and really came up blank.
Sure some corporations have things like CompanyX dollars that they could give out to employees who then redeem them for something. But in these situations those dollars are back by nothing.
> USD, for example, is only viable because, at the deepest level, trust in it is enforced by US army.
That's a very deep level. At the practical level, USD is viable because court judgements in the US can be settled in dollars (e.g. if somebody is held responsible for killing your goats, you can't demand to be paid back in goats), and US taxes are owed in dollars.
At the deepest level, taxes and courts are maintained by the US government, which I suppose you can say is protected by the US military?
Saying that the high dollar is protected by the US military makes more sense. But the dollar itself is protected by the magnitude and reach of the entire US government, which is only partially maintained and extended by killing people.
> At present no major currency is backed by anything material but trust.
While this is true in theory I trust the Swiss National Bank (in my case) significantly more than all those two bit shysters running crypto exchanges, while being extremely economical with the truth in all their communications.
At it's deepest level the $ is viable because of the consent of the people of the USA. The US Army isn't either capable of enforcing law in the USA or exercising influence out of the USA without that consent.
Chinese yuan is economically backed by state owned companies that routinely sell essential goods and services at below market prices when they otherwise would rise too fast.
The Bitcoin protocol and network continues to operate exactly as expected. Here, people trusted a "bank" (an exchange acting like a bank), and got burned when the bank gambled and lost.
In a practical note, you can just use FTX and Binance to convert between USD and BTC. Withdraw them as soon as possible so your funds safe (as long as the BTC network)
History is more on the side of it happening than not.
“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” -Satoshi Nakamoto
> History is more on the side of it happening than not.
Is this true? Of all the years that various countries have used traditional fiat currency, has debasement happened more years than it hasn't? I don't think so but I'm not certain.
Obviously, nobody can predict the future here, and history tells us that all empires come to an end at some point. But we're watching crypto speed-run through all of the issues that the American banking system had in the Free Banking era leading up to the creation of the Fed. Operating in this trustless crypto system still makes it possible for people in control to do stupid things which threaten the viability of the entire system.
Personally, I think cases like this prove that wealth concentration in the hands of the few leads to these situations. It's a not a government problem, it's a concentration of wealth and power problem. Individuals shouldn't have this much money or power to act so recklessly, but we accept the outcome as a consequence of our winner-take-all culture.
>Is this true? Of all the years that various countries have used traditional fiat currency, has debasement happened more years than it hasn't? I don't think so but I'm not certain.
Do you know of any currency over the past 200 years that has suffered deflation throughout that period?
I don't mean "occasionally has one year with deflation", I mean, the real value of 1 unit of that currency 200 years ago was less than what it is today.
Certainly major currencies have experienced periods of deflation (i.e. the Great Depression, the Great Recession, etc.). But deflation is a sign of weakening economy as well. There's an obsession with inflation, but the reality is that some inflation is inevitable in a growing economy as demand outpaces supply. Economists agree pretty consistently on that.
I want to be very clear here, because I believe you're saying what you are saying because you have been taught that way, and because the mainstream media and general economic literature seem to hold that view, and so you, in good faith, are merely repeating it.
You are wrong.
The economist that agree with that view are also wrong, or they are biased by conflicts of interest.
The central banks that support and propagate that view, have a significant conflict of interest as well.
I heavily recommend you consider the incentives of the people teaching that view, and that you re-think from the most elementary of economic principles how exactly that would work.
There is no long term benefit to monetary inflation.
I cannot repeat this enough, monetary inflation, just like monetary deflation, is a distortion on the market, and like any other distortions on the market, it has a net negative expected value.
Of course this negative expected value is distributed throughout the entire economy, whereas the benefits are concentrated on one entity, the issuer of the currency, which is the central bank and the state by association.
"Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market."
My personal belief is that binance agreed with no intention to carry out the deal. CZ tapdanced on FTX's grave on twitter with critical comments yesterday. It is now unlikely that anyone else will want to step up to look at the deal.
My prediction: nobody will touch FTX and whatever is left of it will be in legal battles for years to come. Most will get auctioned to recoup the big fish making the most noise and maybe pennies after that for individual users which had funds on FTX. There is near zero value in an exchange-brand which took a reputational hit as big as this.
Sbf could have printed money if he didn’t get so greedy.
Maybe ftx would have been a top 10 exchange, instead of the third largest.
Maybe alameda would have been a standard successful prop shop (though they were really struggling as trading got more competitive).
He would have just been worth a few billion.
But here we are now.
I have a lot of friends on the inside and nobody knew at all. These friends knowingly kept money there confident the rumors weren’t true. I don’t know how much all of alameda knew but I don’t think the rank and-file knew the full story.
And how do you even lose 8bn? Did alameda become a shop making leveraged long crypto bets? Using a shitcoin as collateral? I know they’re smarter than that, so what happened????
MSTR down 50% in 2 days. That will also be going to zero, too given how much debt it carries. Leverage on an such a volatile but likely worthless asset is financial suicide. What were these people thinking. Leverage on index funds is pretty risky, but on bitcoin? Makes no sense.
For most exchanges there are not many assets worth liquidating. The code and infra is standard, exchange A does not gain much from having exchange B's code. There are generally no special client relations you want to inherit. The offices are probably rented if not remote. The branding is valuable but adversarial to your own.
Essentially an exchange can be summed up as total crypto assets minus total crypto liabilities. If that number is negative then the exchange is just gone, no point in buyout.
Real answer? If the value of maintaining trust in the over-all ponzi environment is worth more to you than the lost value of the failed ponzi scheme, it might be worth buying the other ponzi scheme.
I hope so. Crypto scams hurt real people who put real money into this thing. Whatever "financial engineering" happened to vaporize X billion surely did more harm, and to many more people, than the average felony theft.
There are so many laws, so many jurisdictions involved, and so much complexity and ambiguity that it seems basically certain laws were broken. So, we have broken laws and injured parties - seems correct to pursue criminal charges.
yeah crypto deposits don't have the same protections as securities which is why you don't want to leave them in an exchange wallet. I'm going to guess somewhere in here there's enough for a fraud charge though. I don't know enough to explain why, but my hunch is he didn't lose all this money by going around and making honest mistakes.
Is the “traditional” finance world this…incestuous? As a casual observer, the crypto ecosystem is almost entirely made up of folks printing Monopoly money, hyping it until it’s nominally worth something, loaning it to each other, and then gambling with the loans everyone took out.
What is so strange about this and seems a bit fishy is how quickly this has all happened. How has Binance decided in about 24 hours to not do the deal? With other deals of this type, this process typically takes weeks if not months. Any insights?
CZ is playing 4D chess. FTX goes down and customers flee to Binance. Why pay for something that will be free? Or pay pennies on pennies on the dollar in bankruptcy court where nobody will be bidding except maybe with a 10-foot pole.
There is a transcript out there where Levine was talking to "SBF":
"Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good."
What happens to all the companies that FTX gobbled up? Was that just a ploy to try to stabilize the crypto space? Are those companies that were going defunct now going to go defunct again?
It sounds like this Web3 space is not decentralized at all. With those 4-5 crypto exchanges we cannot talk about bulding real businesses on those technologies, we are super early.
Super early, or... such systems tend to centralisation.
There are very few successfully distributed systems I can think of. Bittorrent is on. I guess we could argue some markets in the economic sense are distributed. But in reality even both of those are part-centralised.
Just turns out centralisation is usually more efficient and more convenient.
Called it! But it is very concerning that people think this is Binance fault somehow. They were not the ones who misused the funds. They were not the ones who over leveraged. All CZ did was to point out that Mr. Fried was not being honest
As usual, Levine put it best: “the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet” [1].
Before one is insolvent, illiquidity and insolvency are circular questions of asset value. After the fact, it shouldn’t take someone more than a few minutes to come to a conclusion. (There is a deeper discussion on the folly of accepting as collateral assets correlated with confidence in oneself. I recommend reading the article.)
[1] https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...